Chapter 7. Comparative Advantage and the Gains from International Trade

Transcription

1 Chapter 7. Comparative Advantage and the Gains from International Trade Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON Principles of Macroeconomics

2 International Trade International trade has grown tremendously over the past 50 years. This is the result of... the falling costs of shipping products the spread of reliable communications and transportation changes in government policies Tariff: A tax imposed by a government on imports Imports: Goods and services bought domestically but produced in other countries. Exports: Goods and services produced domestically but sold in other countries.

3 The Importance of Trade to the U.S. Economy International Trade Is of Increasing Importance to the U.S. Both exports and imports have been steadily increasing as a fraction of U.S. GDP. Each year, the U.S. exports about 50% of its wheat and rice crops and 20% of its corn crop. About 20% of U.S. manufacturing jobs depend directly (or indirectly) on exports.

4 U.S. International Trade in a World Context The Eight Leading Exporting Countries, 2010 The United States is the leading exporting country, accounting for 9.7 percent of total world exports. The values are the shares of total world exports of merchandise and commercial services.

5 U.S. International Trade in a World Context International Trade as a Percentage of GDP International trade is still less important to the United States than to most other countries. Belgium and Netherlands imports and exports make up more than half of GDP.

6 A Brief Review of Absolute and Comparative Advantage Absolute advantage: The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources. Comparative advantage: The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity cost: The highest-valued alternative that must be given up to engage in an activity. The basis for trade is comparative advantage, not absolute advantage. Individuals, firms, and countries are better off if they specialize in producing goods for which they have a comparative advantage and obtain the other goods by trading.

7 Comparative Advantage in International Trade Q. Which country should export Cell Phones? (An Example of Japanese Workers Being More Productive Than American Workers) (The Opportunity Costs of Producing Cell Phones and Tablet Computers)

8 Increasing Consumption through Trade (Gains from Trade for Japan and the United States)

9 Why Don t We See Complete Specialization? We do not see complete specialization in the real world for three main reasons: 1 Not all goods and services are traded internationally. Some services are difficult to export, such as medical care. 2 Production of most goods involves increasing opportunity costs. If a country devotes more workers to producing a good, the opportunity cost of producing more of that good will increase, causing the country to stop short of complete specialization. 3 Tastes for products differ. Most products are differentiated. As a result, countries may each have a comparative advantage in producing different varieties of a particular product. Additionally, losers from trade are to convince their government to bar imports of the competing products.

10 Where Does Comparative Advantage Come From? Among the main sources of comparative advantage are the following: 1 Climate and natural resources. 2 Relative abundance of labor and capital. Some countries have a comparative advantage in producing goods requiring highly skilled workers. Others have a comparative advantage requiring unskilled workers and relatively simple machinery. 3 Technology. Some countries are strong in product technologies, which involve the ability to develop new products. Other countries are strong in process technologies, which involve the ability to improve the processes used to make existing products. 4 External economies. Once an industry becomes established in an area, firms that locate in that area gain advantages over firms located elsewhere.

11 Free Trade Makes Consumers Better Off Free trade: Trade between countries that is without government restrictions. (The U.S. Market for Ethanol under Autarky) The equilibrium price of ethanol is $2.00 per gallon, and the equilibrium quantity is 6.0 billion gallons per year.

12 Free Trade Makes Consumers Better Off Now, suppose that the U.S. begins importing ethanol from other countries that produce ethanol for $1.00 per gallon. Once imports of ethanol are permitted, U.S. firms will not be able to sell ethanol at prices higher than the world price of $1.00.

13 Free Trade Makes Consumers Better Off (The Effect of Imports on the U.S. Ethanol Market) Equilibrium moves F G. the price of ethanol falls from $2 to $1. U.S. consumers increase their purchases from 6.0 billion to 9.0 billion gallons. U.S. producers reduce the quantity of ethanol they supply from 6.0 billion to 3.0 billion gallons. Imports equal 6.0 billion gallons, which is the difference between U.S. consumption and U.S. production.

14 Free Trade Makes Consumers Better Off International trade helps consumers but hurts firms that are less efficient than foreign competitors. Thus, these firms and their workers are often strong supporters of government policies that restrict trade. These policies usually take one of following forms: tariffs, quotas, or voluntary export restraints.

15 Tariffs Tariffs: taxes imposed by a government on goods imported into a country. The $0.50-per-gallon tariff raises the price of ethanol in the United States to $1.50 per gallon. Equilibrium moves from point G to point H. U.S. producers increase the quantity they supply to 4.5 billion gallons. U.S. consumers reduce their purchases to 7.5 billion gallons.

16 Quotas and Voluntary Export Restraints Quota: A numerical limit a government imposes on the quantity of a good that can be imported into the country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country. In the 1980s, the U.S. and Japan negotiated a VER that limited the quantity of automobiles the U.S. would import from Japan. Quotas and VERs have similar economic effects.

17 The Economic Effect of the U.S. Sugar Quota In 2010, the sugar quota limits imports to 5.3 billion pounds. U.S. producers supply 15.9 billion pounds. U.S. consumers purchase 21.2 billion pounds rather than the 27.5 billion pounds. With the quota, equilibrium moves from point E to point F